The Government's Tracking Mechanism
Before 2022, the Income Tax Department had very little visibility into who was trading cryptocurrency. To fix this, they introduced Section 194S: a 1% Tax Deducted at Source (TDS) on the transfer of Virtual Digital Assets (VDAs).
The primary goal of this TDS is not to collect revenue, but to leave a paper trail of every crypto transaction tied to your PAN.
Quick stat: The 1% TDS under Section 194S kicks in once your crypto sales cross Rs 50,000 in a year (Rs 10,000 for specified persons) and applies to gross sale value, not profit (Source: Income Tax Act, Section 194S).
How the 1% TDS Works
Whenever you sell a crypto asset or swap one crypto for another on an Indian exchange (like CoinDCX, WazirX, or ZebPay), the exchange is legally required to deduct 1% of the transaction value and deposit it with the government.
- Threshold: The TDS applies if your total crypto sale transactions exceed ₹50,000 in a financial year (or ₹10,000 for certain specified persons).
- It applies to the gross value: If you sell Bitcoin worth ₹1,00,000, the exchange deducts ₹1,000 as TDS, regardless of whether you made a profit or a loss on the trade.
Swapping Crypto (Crypto-to-Crypto trades)
The rules are especially harsh for swapping (e.g., trading Bitcoin for Ethereum). A swap is considered two transactions: selling Bitcoin and buying Ethereum. Therefore, 1% TDS is deducted on both sides of the transaction.
Claiming the TDS Credit
The 1% deducted is not lost money. It is tax paid in advance on your behalf.
- Check Form 26AS / AIS: The exchange deposits the TDS against your PAN. It will appear in your Form 26AS and AIS under Section 194S.
- File your ITR: When you file ITR-2 or ITR-3 and report your 30% tax liability on crypto profits, the 1% TDS you already paid will be subtracted from your final tax bill.
- Refunds: If you made overall losses in crypto (meaning your tax liability is zero), you can claim the 1% TDS back as a tax refund when you file your ITR.
The AIS Trap Because of the 1% TDS, the Income Tax Department knows exactly how much crypto you sold. If your AIS shows ₹10 Lakh in crypto sales, and you file ITR-1 or fail to fill out Schedule VDA, you are practically guaranteeing a tax notice. Use LastMinute ITR to review your AIS and ensure you are filing the correct forms on incometax.gov.in.
Start with LastMinute ITR · import your exchange report · fix an AIS mismatch.
What you should do
- Check Form 26AS / AIS for the total 194S TDS deposited by your exchange.
- Claim that TDS in your ITR and, if you made overall losses, get it back as a refund.
- Remember a crypto-to-crypto swap is two transfers, so 1% TDS hits both legs.
Common mistake
Treating the 1% TDS as a final tax. It is only advance tax. You must still file, report profits at 30%, and adjust the TDS. Skipping the return can mean losing a refund you are owed.